TODD ZYWICKI Posner, Hayek and the economic analysis of law

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Posner, Hayek, and the 
Economic Analysis of Law 
Todd J. Zywicki∗ & Anthony B. Sanders∗∗ 
ABSTRACT: This Article examines Richard Posner’s critique of F.A. 
Hayek’s legal theory and contrasts the two thinkers’ very different views of 
the nature of law, knowledge, and the rule of law. Posner conceives of law 
as a series of disparate rules and as purposive. He believes that a judge 
should examine an individual rule and come to a conclusion about whether 
the rule is the most efficient available. Hayek, on the other hand, conceives 
of law as a purpose-independent set of legal rules bound within a larger 
social order. Further, Posner, as a legal positivist, views law as an order 
consciously made through the efforts of judges and legislators. Hayek, 
however, views law as a spontaneous order that arises out of human action 
but not from human design. For Hayek, law as a spontaneous order—of 
which the best example is the common law—contains and transmits 
knowledge that no one person or committee could ever know and, thus, 
regulates society better than a person or committee could. This limits the 
success of judges in consciously creating legal rules because a judge is 
limited in the forethought necessary to connect a rule to other legal and non-
legal rules and in what Hayek termed “the knowledge of particular 
circumstances of time and place.” 
This Article also explores Posner’s argument that Hayek misunderstood the 
“rule of law” as the “rule of good law.” Contrary to Posner, in the view 
Hayek came to espouse in his later work, the common law embodies the rule 
of law in a way that positivist creations of law do not. When judges 
consciously make law, it is those human actors, not the “law” as such, that 
“rule.” When law arises out of a spontaneous order, however, it is the law 
that rules. Judges merely articulate it. Posner does not distinguish between 
 
 ∗ Professor of Law, George Mason University School of Law; Research Fellow, James 
Buchanan Center for Political Economy: Program on Politics, Philosophy, and Economics, 
George Mason University. Professor Zywicki would like to thank the Law and Economics Center 
of George Mason University School of Law for financial support. 
 ∗∗ Associate Attorney, Arnold & Kadjan, Chicago, Illinois. The Authors would like to 
thank Bill Modahl, Michael Rappaport, Cass Sunstein, Adrian Vermeule, and participants in the 
James Buchanan Center Workshop on Politics, Philosophy, and Economics at George Mason 
University for comments on an earlier draft of this Article. 
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these two processes and, therefore, sees a difference between the rule of law 
and the rule of “good” law that Hayek does not. This is because for Hayek, 
the rule of law is meaningful only in a liberal society where law arises out of 
a spontaneous order. 
 I.  INTRODUCTION ....................................................................................... 561 
 II.  THE NATURE OF JUDICIAL KNOWLEDGE ................................................. 563 
A.  POSNER ON JUDICIAL KNOWLEDGE ...................................................... 563 
B.  HAYEK ON JUDICIAL KNOWLEDGE ....................................................... 564 
C.  HAYEK AND POSNER ON “PRICES” AND “PLANNING” ............................ 569 
1.  Prices, Information, and Equilibrium ................................... 569 
2.  Who Plans? ............................................................................... 573 
3.  Legal Rules and “Planning” .................................................... 574 
 III.  PURPOSES OF LAW ................................................................................... 577 
A.  PRECEDENT ....................................................................................... 579 
B.  LEVEL OF SELECTION OF LEGAL RULES ............................................... 583 
 IV.  THE RULE OF LAW .................................................................................. 586 
 V.  HAYEK, KELSEN, AND POSNER ON POSITIVISM AND LEGAL CHANGE ....... 595 
 VI.  CONCLUSION .......................................................................................... 602 
 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 561 
I. INTRODUCTION 
Although Friedrich August von Hayek (1899–1992) was trained as a 
lawyer and earned a Nobel Prize as an economist, he has been largely 
ignored by modern law-and-economics scholars. Richard Posner’s recent 
essay comparing Hayek and Hans Kelsen through the lens of the economic 
analysis of law indicates why Hayek has been overlooked by the modern 
school of law and economics.1 The Hayekian view of the world rests on 
conceptions of law, economics, and the state that are fundamentally at odds 
with prevailing modes of analysis. Finding this fundamental incompatibility, 
Posner concludes somewhat surprisingly (to both conventional wisdom as 
well as himself) that it is Kelsen, not Hayek, who provides a better fit with 
modern law-and-economics analysis. 
This Article focuses on three areas of contrast between Posner’s and 
Hayek’s models of the economic analysis of law. This comparison, however, 
quickly reveals more fundamental and far-reaching distinctions between the 
Posnerian and Hayekian systems. At root, the two systems of law turn on 
radically different assumptions about the nature of knowledge and 
ignorance in society and the economy and about the effect that this has on 
the nature of the judicial process. Posner believes that judges (such as 
himself) are capable of collecting and applying substantial amounts of both 
factual and theoretical knowledge that can and should be used to inform the 
judicial function. Hayek, by contrast, is doubtful that any collective decision 
maker, including a judge, has the ability to collect and weigh enough 
information to be able to consciously develop and improve the law 
according to any measuring stick of social outcome. 
From this fundamental disagreement about the nature of knowledge 
and the ability of judges to harness it, fundamental disagreements also arise 
about both the positive and the normative economic analysis of law. First, 
Posner and Hayek hold fundamentally different views about the nature of 
the common law, as encapsulated in Hayek’s characterization of the 
common law as a “spontaneous order,” in contrast to Posner’s 
conceptualization of the common law as essentially a collection of disparate 
 
 1. Judge Posner originally produced this essay for a conference sponsored by the 
European Association for Law and Economics in Vienna in 2001. See Richard A. Posner, Kelsen, 
Hayek, and the Economic Analysis of Law, Lecture at the Eighteenth Annual Meeting of the 
European Association for Law and Economics (Sept. 14, 2001) (prepared text on file with the 
Iowa Law Review). The essay was then included as Chapter 7 in RICHARD A. POSNER, LAW, 
PRAGMATISM, AND DEMOCRACY 250–91 (2003) [hereinafter POSNER, LAW, PRAGMATISM, AND 
DEMOCRACY]. It was again used in a symposium article in Richard A. Posner, Hayek, Law, and 
Cognition, 1 N.Y.U. J.L. & LIBERTY 147 (2005) [hereinafter Posner, Hayek, Law, and Cognition]. 
This latest version expanded upon the previous works and included some discussion of Hayek’s 
theory of psychology and a more general critique of Austrian economics. For the most part, this 
Article refers to the version in Law, Pragmatism, & Democracy, but it also makes use of the New 
York University Journal of Law and Liberty version. 
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rules. Second, these contrasting views of the common law lead to a radical 
difference of opinion regarding thenormative purpose of law in society. 
Posner argues that judges should consciously use law to further designated 
social goals, namely wealth maximization. Hayek, by contrast, argues that the 
purpose of the law should be to create the conditions necessary for the 
maintenance of the spontaneous order of society, including the spontaneous 
order of the common law itself. Hayek’s approach actually reinforces the 
traditional model of the common law as a logical system in which judges 
engage in analogical and doctrinal reasoning. Hayek views this as the proper 
role of judges, whereas Posner views it as naïve. Finally, these contrasting 
views of the nature of law and the role of economic analysis in law generate 
fundamentally different views of the rule of law. Whereas Posner contends 
that Hayek confuses the rule of law with the rule of good law or the rule of 
liberal law, the analysis presented here reveals that Hayek views the rule of 
law as being determined precisely by its relationship to a liberal social order 
and market economy. Thus, there is in fact no confusion in Hayek’s use of 
the rule of law, but rather it may be Posner who is confused because his use 
of the term fails to situate it in a social context. 
At bottom, Hayek argues that judges should act as common-law judges 
traditionally were believed to have acted: they should apply the law as it is 
and as it has grown over time instead of independently formulating new law 
untethered to the larger social order. When Posner faults Hayek for not 
allowing the law to evolve, he misunderstands Hayek’s view of legal change. 
Hayek does not call for the law to remain beholden to prior custom without 
adapting to new circumstances. Hayek merely argues that, on the whole, 
judges should not change the law. Because law arises through a spontaneous 
process, it is in law’s very nature that it will change. Judges should look to 
how law has changed and not create those changes through social planning. 
The purpose of this Article is not to defend Hayek’s legal theory as 
either an accurate descriptive model of the common law as a historical 
system or as a normative system on economic principles. Instead, it is 
primarily intended to clarify Hayek’s views in order to better assess Posner’s 
critique. As will be seen, Posner’s characterization of Hayek misunderstands 
Hayek in some subtle, but important, ways. Hayek’s model of law is rooted in 
the traditional common law method but justified by economic reasoning, 
albeit economic reasoning that differs from Posner’s neoclassically 
grounded economics. 
Part II of this Article thus begins with an explanation of the different 
understandings of knowledge in Hayek’s and Posner’s systems of economics. 
Part III then compares Hayek’s and Posner’s views of law and the judicial 
role in the common law. Part III addresses Posner’s criticism of Hayek’s 
understanding of the concept of the rule of law. Part IV concludes with an 
analysis of the accuracy and normative attractiveness of these two rival views 
of the economic analysis of law and provides a Hayekian response to 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 563 
Posner’s claim that there is no room for legal change in Hayek’s legal 
system. 
II. THE NATURE OF JUDICIAL KNOWLEDGE 
The foundation for the disagreement between Posner and Hayek on 
the economic analysis of law is grounded in a fundamental difference 
between the two over the nature of knowledge and its accessibility to 
collective decision makers such as judges. 
A. POSNER ON JUDICIAL KNOWLEDGE 
The cornerstone of Posner’s economic analysis of law is that judges can, 
do, and should use economic principles to inform their decision making 
and to improve the law itself. Embedded within this analysis is a 
fundamental assumption about the ability of judges to compile and analyze 
the knowledge necessary to understand the implications of their decisions 
and to render those that will have both the goal and effect of improving the 
economic efficiency of the law. 
In Posner’s view, when a judge announces a legal rule, he must take 
into consideration the future effects of that rule. For example, in a torts 
case, the judge should “consider the probable impact of alternative rulings 
on the future behavior of people engaged in activities that give rise to the 
kind of accident in the case before him.”2 In choosing between possible 
rules, efficiency is the paramount criterion. According to Posner, judges 
“might as well concentrate on increasing” efficiency because they are not 
well disposed, qua common-law judges, to enforce alternative values, such as 
wealth redistribution.3 Thus, Posner views judges as future-looking rule 
makers who decide which rules to impose on the parties before them based 
upon the most efficient outcome that will follow from those rules. This 
includes assessing what would be the most efficient outcome in 
circumstances where, because of transaction costs, a transaction would not 
occur without judicial intervention.4 
Viewing judges as rule makers who seek the most efficient outcome begs 
the question of how judges decide what rule will be the most efficient. Posner 
admits as much when he states that “the economic theory of law presupposes 
 
 2. RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 26 (6th ed. 2003). 
 3. Id. at 252 n.3; see also id. at 533 (“If, therefore, common law courts do not have 
effective tools for redistributing wealth . . . it is to the benefit of all interest groups that courts 
. . . should concentrate on making the pie larger.”). 
 4. See, e.g., id. at 250 (“[T]he common law establishes property rights, regulates their 
exchange, and protects them against unreasonable interference—all to the end of facilitating 
the operation of the free market, and where the free market is unworkable of simulating its results.” 
(emphasis added)). See generally Ronald H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1 
(1960) (arguing for an approach to social arrangements that takes into account the total effect 
of those arrangements). 
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machinery for ascertaining the existence of the facts necessary to the correct 
application of a law.”5 Judges must rely not only on the facts provided by the 
parties in the cases before them, but also on general social science data that 
can help judges ascertain how a legal rule will influence behavior.6 
Posner admits that there are some limits to this view, limits that Hayek, 
as is discussed below, recognizes much more concretely. Posner states that in 
crafting new rules of law, “judges, and legal professionals in general, may be 
so bereft of good sources of information . . . that their most efficient method 
of deciding cases and resolving issues of institutional design is to follow, or at 
least to be strongly constrained by, precedent.”7 Posner limits this handicap, 
however, to situations where social change has created conditions so 
removed from the judges’ knowledge that precedent is the only reference 
point. This is not meant to imply that Posner does not believe judges should 
generally adhere to precedent—he does—but rather that judges should also 
seek outside information in crafting legal rules. 
B. HAYEK ON JUDICIAL KNOWLEDGE 
Hayek holds a far less optimistic view of the ability of judges to collect 
and synthesize the degree of knowledge necessary to engage in the far-
reaching economic balancing encouraged by Posner or to even predict 
whether the adoption of a particular rule will make society better- or worse-
off. Others have questioned whether judges are suited by training and 
expertise to engage in the far-ranging inquiry demanded of the Posnerian 
wealth-maximizing judge.8 Scholars have alsoquestioned whether judges in 
fact are as likely to adopt wealth maximization as their primary goal, as 
Posner believes, instead of egalitarian or redistributive goals.9 Hayek’s 
challenge, however, is more fundamental—assuming that a judge possesses 
the technical ability to execute the economic analysis necessary to choose 
the economically efficient rule and assuming further that the same judge 
faithfully seeks to implement his scheme, can such a judge actually predict 
that any decision he makes will in fact effectuate an improvement in the law?10 
In other words, if Richard Posner himself had the time to rule on every 
important case, could he in fact effectuate substantial long-term 
improvement in the law? 
 
 5. POSNER, supra note 2, at 267. 
 6. See id. at 19–20; Posner, Hayek, Law, and Cognition, supra note 1, at 165. 
 7. Id. at 561. 
 8. See generally James M. Buchanan, Good Economics—Bad Law, 60 VA. L. REV. 483 (1974) 
(discussing the first edition of Posner’s Economic Analysis of Law). 
 9. See Todd J. Zywicki, The Rise and Fall of Efficiency in the Common Law: A Supply-Side 
Analysis, 97 NW. U. L. REV. 1551, 1563–64 (2003); James E. Krier, Book Review, 122 U. PA. L. 
REV. 1664, 1694 (1974) (reviewing RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW (1972)). 
 10. 1 F.A. HAYEK, LAW, LEGISLATION AND LIBERTY: RULES AND ORDER 102 (1973). 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 565 
The implications of the Hayekian system suggest that Hayek would say 
“no.” Posner recognizes this intuition: he notes that for Hayek, the notion of 
a “capitalist judge” would be a contradiction in terms, just as the notion of a 
“socialist judge” would be.11 Posner indicates that he believes Hayek’s 
rejection of the concept of a capitalist judge rests on the normative notion 
of the judge’s role in society and the propriety of reading one’s personal 
views into the law. Posner writes, “The contradiction Hayek identifies has 
nothing to do with the content of the judge’s policy views. It lies rather in 
the judge’s allowing those views to influence his decisions.”12 Posner 
concludes that, as a result, the role of a Hayekian judge is “passive,” 
relegated to enforcing the expectations created by custom, rather than 
seeking to improve the law according to socialist principles, capitalist 
principles, or any other principles.13 
Although Posner is correct in observing that Hayek rejects the proper 
role of judges as seeking to improve the law according to capitalist or any 
other principles, Hayek’s rejection lies in positive, not normative, analysis. It 
seems evident that if judges or any other collective decision maker could 
improve the law by reading capitalist principles into it, then the judge 
should do so.14 The challenge, therefore, is not to determine that a judge 
has normative goals, but rather, to determine whether tinkering with 
particular legal rules on the basis of those goals will bring about the desired 
effect of actually improving the law.15 For Hayek, it is this step—trying to 
predict whether changes to the law will actually bring about the predicted 
and desirable economic and social effects that the judge seeks to achieve—
that presents the insuperable obstacle. Thus, Hayek’s critique is not 
primarily grounded in the idea that it is inappropriate for judges to impose 
particular policy views in the law, but rather that it is impossible for judges to 
reliably and predictably bring about the desired policy goals that they seek 
to obtain.16 
 
 11. POSNER, LAW, PRAGMATISM, AND DEMOCRACY, supra note 1, at 277. This is drawn from 
Hayek’s comment in Law, Legislation and Liberty: Rules and Order. See HAYEK, supra note 10, at 
121. 
 12. POSNER, LAW, PRAGMATISM, AND DEMOCRACY, supra note 1, at 277. 
 13. Id. at 278–79. 
 14. In this view, Hayek presumably would disagree with those, such as Buchanan, who 
truly do see the role of judges as being passive, implementing the policy choices made at the 
constitutional or political level. See Buchanan, supra note 8, at 490 (“[T]he judge should not 
change the basic law because, in such behavior, he would be explicitly abandoning his role of 
jurist for that of legislator.”). 
 15. But see Eric Mack, Hayek on Justice and the Order of Actions, in THE CAMBRIDGE 
COMPANION TO HAYEK 259, 281–82 (Edward Feser ed., 2006) (arguing that Hayek might 
contend that not only is there the problem of knowing the facts necessary to design legal rules, 
but also in designing legal rules, one must create a hierarchy of ends that different individuals 
will not be able to agree upon). 
 16. HAYEK, supra note 10, at 102 (noting that the judge “will never be able to foresee all 
the consequences of the rule he lays down”); cf. G. Marcus Cole, Shopping for Law in a Coasean 
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Hayek’s view as to the proper role of the judge derives from his 
observations regarding the ability of judges to overcome their ineradicable 
knowledge of the effects of their decisions and, hence, their inability to 
predict whether their decisions will actually advance or retard the 
achievement of their desired goals.17 In turn, this suggests that although 
Posner is correct in noting that Hayek sees the role of the judge as limited to 
enforcing parties’ legitimate expectations, this does not mean that judges are 
“passive.” Rather, they still retain the task of distinguishing legitimate from 
illegitimate expectations, determining how particular rules fit within the 
larger overall framework of rules, and determining how legal and non-legal 
rules have changed.18 
Judges, Hayek argues, are fundamentally ignorant about almost all of 
the effects and consequences of their decisions.19 The inability of judges to 
foresee the full implications of their decisions arises from the inherent 
complexity of society and the fundamental inability of judges to collect all of 
the information that would be necessary to determine whether, in fact, any 
given rule will tend to increase economic wealth in the long run.20 As Hayek 
states, “Law-making is necessarily a continuous process in which every step 
produces hitherto unforeseen consequences for what we can or must do 
next.”21 To understand fully why judges cannot predict the full 
consequences of their decisions, it is necessary to review Hayek’s 
understanding of knowledge and how that pertains to judicial decision 
making. 
In his famous essay, The Use of Knowledge in Society, Hayek addresses the 
issue of the nature of knowledge in the context of central economic 
planning under socialism.22 As will become apparent, however, the 
challenge of economic planning under socialism is readily applicable to the 
challenge of a wealth-maximizing Posnerian judge.23 As Hayek notes, the 
“economic problem of society is thus not merely a problem of how to 
allocate ‘given’ resources . . . . It is rather a problem of how to secure the 
best use of resources known to any of the members of society, for ends 
whose relative importance only those individuals know.”24 This decision, in 
 
Market, 1 N.Y.U. J.L. & LIBERTY 111, 115 (2005) (“[V]ery complex orders, comprising more 
information than any one brain could possibly access, can only be brought about 
spontaneously.”). 
 17. See HAYEK, supra note 10, at 102, 117. 
 18. These attributes of Hayek’s system are discussed in greater detail infra Parts IV–V. 
 19. See HAYEK, supra note 10, at 65. 
 20. See id. 
 21. Id. 
 22. F.A. Hayek, The Use of Knowledge in Society, 35 AM. ECON. REV. 519 (1945), reprinted in 
THE ESSENCE OF HAYEK 211, 213 (Chiaki Nishiyama & Kurt Leube eds., 1984). 
 23. See generally Gerald P. O’Driscoll, Jr., Justice, Efficiency, and the Economic Analysis of Law: 
A Comment on Fried, 9 J. LEGAL STUD. 355 (1980). 
 24.Hayek, supra note 22, at 212. 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 567 
turn, necessitates a second decision—should we place primary authority for 
economic decisions in particular contexts in the hands of private economic 
actors or in the hands of centralized decision makers such as central 
planners or judges? Answering this question leads to a corollary—should 
social institutions, such as law, be designed primarily to try to efficiently 
funnel dispersed knowledge from individuals to centralized decision makers, 
or should social institutions primarily seek to convey to decentralized private 
economic decision makers such additional knowledge as they need in order 
to enable them to dovetail their plans with those of others?25 Posner suggests 
that the purpose of social institutions should be to accomplish the former—
to funnel information about individual preferences, constraints, and the like 
to judges, who can then weigh these various elements and come out with a 
rational resource allocation.26 Hayek indicates by contrast that the purpose 
of law is to provide to dispersed economic decision makers the “additional 
knowledge” necessary to rationally plan their own affairs.27 Hayek states the 
puzzle: 
This is not a dispute about whether planning is to be done or not. 
It is a dispute as to whether planning is to be done centrally, by one 
authority for the whole economic system, or is to be divided among 
many individuals. . . . Competition . . . means decentralized 
planning by many separate persons.28 
In other words, the question is whether the purpose of the law is to 
accomplish some overall social objective or plan, such as suggested by 
Posner, or whether the law is designed to serve as an input to individual 
expectations in order to enable individuals to effectuate their own individual 
plans by coordinating their affairs with others who are necessary to 
effectuating those plans. 
An example of Hayekian versus Posnerian planning might be the 
development of products-liability law. Traditionally, products-liability law was 
hedged with concepts of negligence, contributory negligence, and contract 
law.29 These were doctrines that had evolved over centuries and were 
recognized by judges as the established rules of relations between 
manufacturers, distributors, and consumers. Then, largely on account of 
judges following the innovations of law-and-economics research, judges 
 
 25. Id. at 213. 
 26. See Posner, Hayek, Law, and Cognition, supra note 1, at 164–65. 
 27. Id. 
 28. Id.; see also Todd J. Zywicki, Epstein and Polanyi on Simple Rules, Complex Systems, and 
Decentralization, 9 CONST. POL. ECON. 143, 147 (1998) (explaining the difference between 
simple and complex rules). 
 29. See generally RICHARD A. EPSTEIN, MODERN PRODUCTS LIABILITY LAW (1980) (discussing 
the history of products-liability law). 
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deliberately developed strict products-liability rules.30 This was heralded as a 
great achievement because it imposed new legal rules derived from 
economic efficiency calculations rather than evolved doctrine.31 However, 
there is good reason to conclude that strict liability has proven less efficient 
in the long run than the evolved regime it replaced and that the 
unanticipated consequences and individual responses have illustrated the 
perils of judicial central planning, rather than its promise. For instance, it 
may have encouraged moral hazard by allowing for the misuse of products, 
while still allowing misusing consumers to sue. Further, it has ignored the 
ways in which tort law was just one compensation-and-deterrence system 
among several, such as insurance, name brands and trademarks, and third-
party quality assessments (such as Consumer Reports magazine or Underwriters 
Laboratories). So, arguably at least, by imposing a blanket mandatory rule 
rather than the old rule that had evolved, and by failing to anticipate the full 
range of individual responses, strict products liability takes the law in the 
wrong direction. 
Whether strict products liability actually is more or less efficient than 
the regime it supplanted is not the point. Rather, the point is that it could be 
less efficient despite the best efforts of highly educated and capable judges. 
The difficulty is not the education of judges, but the inability to predict 
every possible response. Products liability is merely an example of where 
judges venture forth to provide a new legal rule when they may not—and 
according to Hayek cannot—have enough knowledge to justify that they do 
so.32 
To further understand whether the purpose of law should be to funnel 
information from market actors to judges or from judges to market actors 
(as with strict products-liability law), it is necessary to understand the nature 
of knowledge in the Hayekian system. Hayek distinguishes between two types 
of knowledge—scientific knowledge and “knowledge of the particular 
circumstances of time and place.”33 The latter form of knowledge, Hayek 
emphasizes, is the essence of economic knowledge.34 It consists of such acts 
as knowing of and putting to use a machine not fully employed, reallocating 
a particular individual to a position where his skills can be better used, or 
being aware of a surplus stock of goods that can be drawn upon during an 
 
 30. See Mark A. Geistfeld, Products Liability, in 3 ENCYCLOPEDIA OF LAW AND ECONOMICS 
347, 348 (Boudewijn Bouckaert & Gerrit De Geest eds., 2000), available at http://encyclo. 
findlaw.com/5140book.pdf (“Today efficiency considerations often strongly influence the 
formulation of products liability laws . . . .”); see also GUIDO CALABRESI, THE COST OF ACCIDENTS 
166 (1970) (describing how manufacturers will be responsible for insuring against liability 
resulting from accidents involving their products). 
 31. See Geistfeld, supra note 30, at 348. 
 32. HAYEK, supra note 10, at 12. 
 33. Hayek, supra note 22, at 214. 
 34. See id. at 214. 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 569 
interruption of supplies.35 This type of knowledge is simply not the type of 
knowledge that can be easily transmitted to a centralized decision maker, 
and in some cases it cannot be transmitted at all.36 It includes tacit 
knowledge and other similar types of knowledge but not express costs-and-
benefits data. For decision makers seeking to make maximum use of this 
knowledge of time and place, it is necessary that they have “additional 
knowledge.”37 
C. HAYEK AND POSNER ON “PRICES” AND “PLANNING” 
1. Prices, Information, and Equilibrium 
Hayek focuses on the price system as an institution that provides the 
type of “additional knowledge” that individuals need in order to make 
efficient use of decentralized knowledge.38 He uses the example of a change 
in the market for tin, such as an increase in demand through a new use for 
tin or a decrease in supply through the elimination of a source of tin.39 It 
does not matter whether there is an increase in demand or a decrease in 
supply—in fact, as Hayek stresses, it is significant that it does not matter what 
caused the tin scarcity.40 “All that the users of tin need to know,” he observes, 
“is that some of the tin they used to consume is now more profitably 
employed elsewhere and that, in consequence, they must economize tin.”41 
Most users of tin need not know where the more urgent need has arisen or 
why.42 Only a small number of users need to know of the initial scarcity for 
information to be transmitted through the price system to signal that tin has 
become scarcer.43 Hayek illustrates the chain of information transmission 
that conveys to end users of tin the need to conserve ormake more efficient 
use of tin: 
If only some [users of tin] know directly of the new demand, and 
switch resources over to it, and if the people who are aware of the 
new gap thus created in turn fill it from still other sources, the 
effect will rapidly spread throughout the whole economic system 
and influence not only all the uses of tin but also those of its 
substitutes and the substitutes of these substitutes, the supply of all 
the things made of tin, and their substitutes, and so on; and all of 
 
 35. Id. 
 36. Id. at 217. 
 37. Id. at 213. 
 38. Hayek, supra note 22, at 219. Or, indeed, to make investments to develop this sort of 
tacit and decentralized knowledge. See id. 
 39. Id. at 218. 
 40. Id. at 219. 
 41. Id. 
 42. Id. 
 43. Hayek, supra note 22, at 219. 
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this without the great majority of those instrumental in bringing 
about these substitutions knowing anything at all about the original 
cause of these changes. The whole acts as one market, not because 
any of its members survey the whole field, but because their limited 
individual fields of vision sufficiently overlap so that through many 
intermediaries the relevant information is communicated to all.44 
Posner, by contrast, uses an example of milk delivery in New York City, 
which at first glance appears to illustrate the same point as Hayek’s tin mine. 
“No milk czar decides how much milk is needed when and by whom and 
then obtains the necessary inputs, which include dairy farms and farmers, 
milk-supply plants, refrigerated milk trucks, packaging equipment and 
materials, accounting and other support activities, and the scheduling and 
provision of delivery to retail outlets.”45 The only coordinator that brings 
together all these suppliers of raw materials, labor, and capital is the price 
system.46 Moreover, not only are they coordinated within the milk 
distribution system, the milk distribution system is coordinated with still other 
markets, regionally, nationally, and even globally.47 
But by altering Hayek’s example, it appears that Posner has in fact also 
inadvertently, but importantly, recharacterized Hayek’s point. Hayek chose 
this example to illustrate the dynamic nature of markets and the price system, 
which responds in a rapid and decentralized manner to an exogenous 
demand or supply shock.48 Posner’s example, by contrast, is one of a static 
analysis of the market and the coordination of the many individuals in the 
market. While the market, of course, performs both functions, the choice of 
examples also illustrates a subtle difference of mindset in the different ways 
that Hayek and Posner view the law and other social institutions, such as 
markets. For Posner, the world is essentially orderly, predictable, and in 
equilibrium.49 The fundamental social problem, therefore, is how to arrange 
social, legal, and economic institutions so as to maximize social wealth in 
equilibrium. Coordination of individual activity is essentially taken for 
granted, and the goal is to ensure that this coordination occurs at the level 
of interaction that maximizes social wealth. 
For Hayek, by contrast, the world is fundamentally in disequilibrium, 
although constantly trying to move toward equilibrium.50 The marvel is not 
that coordination occurs without the oversight of a “milk czar,” but rather 
that coordination occurs at all in light of the fact that coordination could not 
 
 44. Id. 
 45. Posner, Hayek, Law, and Cognition, supra note 1, at 149. 
 46. Id. 
 47. Id. 
 48. See HAYEK, supra note 10, at 104. 
 49. See Posner, Hayek, Law, and Cognition, supra note 1, at 162–63. 
 50. See HAYEK, supra note 10, at 105. 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 571 
be imposed by any milk czar. Every action by any individual creates a new 
perturbation to the system—a new use for tin or the elimination of a source 
of tin. From a civil war in Zambia to a flat tire in Brooklyn, there are 
constant disruptions to the flow of goods and services. The miracle, 
therefore, is that coordination can emerge from this chaotic stew of 
disparate individual actions and motivations. For Hayek, therefore, the goal 
of social institutions—including law—is fundamentally to enable smooth 
individual coordination.51 Coordination cannot be taken for granted—smooth 
coordination results only from the existence of social institutions that enable 
individuals to predict one another’s actions.52 
Indeed, Hayek’s understanding of equilibrium itself differs from the 
standard neoclassical model that underlies Posner’s example.53 The 
differences between the two conceptions of equilibrium are worth 
elaborating upon here, as they relate directly to Hayek’s and Posner’s views 
on the ordering power of the common law. The standard understanding of 
equilibrium describes a collective-market phenomenon, where supply and 
demand are in balance.54 “General equilibrium” is thus a model of an entire 
economy where all markets “clear.”55 All that is necessary for a market to be 
in equilibrium, therefore, is to assume that all relevant parties have full 
knowledge of prevailing market prices so that they know the relevant price 
at which to transact.56 For Hayek, however, equilibrium does not describe “a 
market,” rather it describes an individual phenomenon, specifically, the 
coordination of the various plans formulated and pursued by individual 
economic actors.57 Equilibrium is thus a matter of individual coordination of 
plans rather than a description of a social pattern.58 In a society based on 
exchange, once equilibrium is conceived of as coordination of individual 
plans, it becomes evident that the most important information is not the 
price of various goods, but rather the predictability of the actions of other 
people with whom one wants to trade. As Hayek puts it: 
since some of the “data” on which any one person will base his 
plans will be the expectation that other people will act in a 
particular way, it is essential for the compatibility of the different 
 
 51. See id. at 106–07. 
 52. Id. 
 53. See F.A. Hayek, Economics and Knowledge, in 4 ECONOMICA 33 (1937), reprinted in L.S.E. 
ESSAYS ON COST 45 (James M. Buchanan & George F. Thirlby eds., 1981). 
 54. See POSNER, supra note 2, at 8. 
 55. See id. 
 56. See id. 
 57. Hayek, supra note 53, at 48–49. 
 58. Id. at 49–50. 
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plans that the plans of the one contain exactly those actions which 
form the data for the plans of the other.59 
To say that “society” is in a state of equilibrium, therefore, “means only that 
compatibility exists between the different plans which the individuals 
composing it have made for action in time.”60 He adds: 
It appears that the concept of equilibrium merely means that the 
foresight of the different members of the society is in a special 
sense correct. It must be correct in the sense that every person’s 
plan is based on the expectation of just those actions of other 
people which those other people intend to perform, and that all 
these plans are based on the expectation of the same set of 
external facts, so that under certain conditions nobody will have 
any reason to change his plans. . . . [Correct foresight] is . . . the 
defining characteristic of a state of equilibrium.61 
Equilibrium is thus disturbed whenever one person changes his plans, 
thereby upsetting the interwoven plans of others. A plan may change either 
as the result of an internal impulse (simply a subjective change of mind) or 
in response to an external stimulus (such as an unexpected collapse of a tin 
mine). As illustrated in his example of the New York milk market, Posner 
sees thekey economic question as one of the coordination of the division of 
labor through the price system, thereby enabling milk to be delivered 
efficiently to the proper location.62 Hayek, however, stresses that in addition 
to the division of labor, there is also a problem of the division of knowledge.63 
This describes not just the problem of the efficient distribution of milk, but 
also the more complicated question of how parties decide whether to 
manufacture, distribute, and consume milk instead of yogurt, ice cream, 
cheese, or dairy products at all.64 The value of the price system, therefore, is 
to send signals to market actors as to how much dairy product to produce, 
what kinds of dairy products to produce, and, even more far-reaching, 
whether to allocate a given parcel of land to dairy farming at all or to 
something else.65 By focusing only on the coordination of the division of 
 
 59. Id. at 50–51. 
 60. Id. at 53. 
 61. Id. at 54. 
 62. See Posner, Hayek, Law, and Cognition, supra note 1, at 149 (“There is no 
coordination—except price.”). 
 63. Hayek, supra note 53, at 63–64. 
 64. See id. at 63 (stating that how different commodities are used is the larger aspect of the 
problem of knowledge). 
 65. Hayek states: 
[P]rice expectations and even the knowledge of current prices are only a very 
small section of the problem of knowledge as I see it. The wider aspect of the 
problem of knowledge with which I am concerned is the knowledge of the basic 
fact of how the different commodities can be obtained and used, and under what 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 573 
labor, Posner essentially ignores this larger context and the larger value of 
the information transmitted by the price system. The price system allows 
individual consumer decisions about preferences for milk to be transmitted 
through many steps to decisions about how many cows a dairy farmer should 
own and even whether his farm is better used as a dairy farm or a strip mall 
in light of future expectations of competing needs. Prices thus enable 
parties to better coordinate their plans by enabling them to predict how 
other parties are likely to act in the future. 
2. Who Plans? 
To understand whether the purpose of law should be to funnel 
information from market actors to judges or, instead, from judges to market 
actors, it is first necessary to understand the nature of knowledge in the 
Hayekian system. 
Hayek distinguishes between two types of knowledge—scientific 
knowledge and “knowledge of the particular circumstances of time and 
place.”66 Hayek never expressly defines the concept of scientific knowledge 
except in contrast to its alternative. In general, scientific knowledge seems to 
refer to knowledge of general and scientifically falsifiable rules. In the 
context of economics, Hayek implicitly uses the term to refer to economic 
decision making by a panel of experts who can acquire and synthesize all 
relevant economic information and allocate resources rationally according 
to some specified general rule, such as to ensure that economic resources 
are allocated such that the marginal rate of substitution of all economic 
goods is equal across the economy. As Hayek states, “If we possess all the 
relevant information, if we can start out from a given system of preferences, 
and if we command complete knowledge of available means, the problem 
which remains is purely one of logic.”67 At that point, it would be “just” a 
problem of working out many billions of mathematical equations to allocate 
resources according to the general rule.68 If all of these criteria were 
somehow met, then the economy would become one massive, but logically 
solvable, technical problem that experts could theoretically resolve 
according to some plan. 
On the other hand, again, the essence of economic knowledge is the 
“knowledge of the particular circumstances of time and place.”69 This 
 
conditions they are actually obtained and used . . . that is, the general question of 
why the subjective data to the different persons correspond to the objective facts. 
Id. 
 66. Id. at 214–15. 
 67. Id. at 211. 
 68. As Hayek notes, however, even if this were possible, it still leaves open the question of 
how the experts themselves should be chosen, a question that cannot be resolved on purely 
scientific grounds. Hayek, supra note 53, at 213. 
 69. Id. at 214. 
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consists of the “facts on the ground” that individuals in the economy must 
gather and assess in making their own local economic decisions. As such, it 
cannot be easily communicated to a centralized decision maker and often, 
due to its particularized and perhaps infinite nature, cannot be transmitted 
at all.70 It includes unspoken tacit knowledge but not express costs and 
benefits data.71 Planners who hope to use this knowledge of time and place 
require “additional knowledge.”72 
3. Legal Rules and “Planning” 
For Hayek, legal rules are another social institution similar to that of 
prices. Legal rules convey information to individual actors about how they 
should behave and permit accurate predictions about how other people are 
likely to behave, thereby enabling a more seamless dovetailing of 
expectations and individual plans.73 “[T]he system of rules into which the 
rules guiding the action of any one person must be fitted does not merely 
comprise all the rules governing his actions but also the rules which govern 
the actions of the other members of the society.”74 This emphasis on coordination 
is illustrated in Hayek’s subtle observation, for instance, that property law 
operates “not by directly assigning particular things to particular persons, 
but by making it possible to derive from ascertainable facts to whom 
particular things belong.”75 This knowledge, in turn, specifies who has the 
authority to decide to what use, among many competing possible uses, 
particular things can be put. But even more importantly, it enables others to 
unambiguously recognize who has authority to use or dispose of those 
resources. 
Prices and legal rules, however, are not the exclusive social institutions 
that perform these sorts of functions. Tradition is a particularly powerful 
and important source of rules that provides guidance as to parties’ 
legitimate expectations of one another’s actions and, therefore, improves 
interpersonal coordination.76 Greater coordination among people governed 
by a set of social, legal, and economic rules enables each individual to make 
maximum use of his local knowledge and to accomplish his own goals.77 In 
 
 70. Id. at 217. 
 71. See id. 
 72. See id. at 213. 
 73. Thus, both legal rules and economic prices comprise some of the “external facts” that 
parties rely upon in coordinating their plans with one another. See text accompanying supra 
note 61. As Marcus Cole observes, Hayek’s analogy between prices and legal rules is imperfect. 
See Cole, supra note 16, at 121–22. The difficulties in the analogy identified by Professor Cole do 
not appear to undermine the use of the analogy as discussed here. 
 74. F.A. HAYEK, LAW, LEGISLATION, AND LIBERTY: THE MIRAGE OF SOCIAL JUSTICE 25 (1976) 
(emphasis added). 
 75. Id. at 37. 
 76. See HAYEK, supra note 10, at 85–88. 
 77. See id. at 99. 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 575 
turn, enabling individuals to maximize the use of their local knowledge is 
the necessary condition for prosperity and wealth maximization.78 
This observation about the importance of tradition as a provider of 
social rules to further the goal of interpersonal coordination has an 
additional implication for understanding the role of judges in Hayek’ssystem versus Posner’s. A characteristic feature of Posner’s jurisprudence is 
an implicit belief in legal-centrism, which is the idea that law is the primary 
and often determinate system of rules for determining social outcomes. 
Thus, whether the field under study is divorce, bankruptcy, torts, or 
employment discrimination, Posner implicitly assumes that the actions of 
the parties subject to those legal rules are determined primarily by those 
rules and the incentives they create.79 Hayek, by contrast, recognizes that 
legal rules are merely one of many different sets of social rules that govern 
interactions.80 This recognition further complicates the efforts of a judge 
seeking to determine the “efficient” rule in any given situation. A Posnerian 
judge will thus face a three-fold challenge. First, the judge must possess 
sufficient learning, information, and expertise to be able to determine the 
efficient legal rule in isolation. Second, the judge must be able to determine 
whether the efficient rule in isolation is also the efficient rule when 
embedded in and interacting with other relevant legal rules. But finally, the 
judge must be able to discern how the legal rule interacts with other non-
legal rules that may be relevant to the determination.81 
Consider, for instance, the concept of fiduciary duty in Anglo American 
corporate law. Imagine a judge attempting to determine whether to impose 
a scheme of fiduciary duty on corporate officers and directors, as opposed to 
a contractarian approach. First, the judge would need to know whether 
governance by fiduciary duty is an efficient rule, a debate that goes back 
generations and has attracted the attention of many of the leading and most 
economically sophisticated judges and legal thinkers. Second, the 
determination of the existence and efficient scope of fiduciary duty in any 
given situation also will depend on the rules of contract that prevail and, in 
particular, on how courts treat relational contracts as opposed to discrete 
contracts. Other areas of law may also be relevant. Finally, the efficacy of 
fiduciary duty as a restraint on managerial agency costs may also be a 
function of more diffuse social norms and traditions. For instance, there 
appear to be substantial differences among countries and cultures in the 
 
 78. See id. 
 79. Posner, Hayek, Law, and Cognition, supra note 1, at 151. 
 80. See HAYEK, supra note 10, at 74. 
 81. See id. at 26 (“This may well mean that the rule one ought to follow in a given society 
and in particular circumstances in order to produce the best consequences, may not be the best 
rule in another society where the system of generally adopted rules is different.”). 
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576 93 IOWA LAW REVIEW [2008] 
levels of interpersonal and social trust.82 It is plausible that the level of social 
trust would be an important consideration in determining whether a given 
society can be best governed by broad and informally defined concepts such 
as fiduciary duty, rather than by more specific contractarian, regulatory, and 
rule-bound concepts.83 
Stated more concretely, while high-trust societies such as the United 
States can govern large corporations by fiduciary duty, in a low-trust society 
such as Russia, reliance on fiduciary duty may be an invitation to looting and 
self-dealing by corporate directors. In turn, the difficulty of structuring low-
cost, effective substitutes for fiduciary duty obligations in low-trust societies 
has the effect of limiting the size and scale of corporations in low-trust 
societies. Francis Fukuyama argues, for instance, that in order to minimize 
the agency problems associated with a separation of ownership and control, 
corporations in low-trust societies tend to be family-owned and to operate on 
a relatively small scale, as opposed to the far-flung separation of ownership 
and control in American corporations, characterized by widely held stock 
holdings.84 In turn, a society dominated by family-owned corporations will 
generate its own set of financial, market, and legal institutions that will differ 
dramatically from other societies. Imposing the “wrong” legal rule, 
therefore, will have the additional consequence of causing private actors to 
try to develop new self-help systems and other market responses to 
compensate for the unfortunate rule.85 
This example, as well as the earlier example of strict products-liability 
law,86 reveals the profound difficulties involved in determining an efficient 
rule in isolation, much less understanding it with reference to other 
substantive bodies of law (such as contract law) and larger market and social 
institutions (such as levels of trust). Hayek would likely argue it is hubristic 
 
 82. See Paul J. Zak & Stephen Knack, Trust & Growth, 111 ECON. J. 295, 296 (2001) 
(presenting a study that determines why trust varies across societies). 
 83. For an argument along these lines, see Lynn A. Stout, On the Export of U.S.-Style 
Corporate Fiduciary Duties to Other Cultures: Can a Transplant Take?, in GLOBAL MARKETS, 
DOMESTIC INSTITUTIONS: CORPORATE LAW AND GOVERNANCE IN A NEW ERA OF CROSS-BORDER 
DEALS 46 (Curtis J. Milhaupt ed., 2003). 
 84. FRANCIS FUKUYAMA, TRUST: THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY 49–
50 (1995). 
 85. An example is the American experience with the Robinson–Patman Act, an antitrust 
statute that, among other things, prohibits “price rebates” to consumers. 15 U.S.C. § 13(a) 
(2000). Subsequent interpretations of Robinson–Patman have held that coupons are not price 
rebates and, thus, do not run afoul of the Robinson–Patman Act. See Fed. Trade Comm’n v. 
Fred Meyer, Inc., 390 U.S. 341, 358 (1968). As a result, even though the Act clearly is 
inconsistent with competition and consumer welfare, the ability to easily circumvent it through 
the issuance of coupons substantially ameliorates the harm caused by the Act. In turn, 
American consumers have developed an expectation of using coupons in shopping, and 
advertisers have developed marketing schemes around them. This is provided as evidence of 
the manner in which legal rules interact with market practices in unpredictable ways. 
 86. See supra notes 29–32 and accompanying text. 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 577 
for a judge confronted with such challenges to try to rewrite the law 
according to any defined criteria, whether they seek to support efficiency, 
social justice, or feminist notions of equality. Instead, given that there are 
radical limits on the judge’s ability to predict the full effects of his decision, 
the wise judge would also be a modest judge and would thus attempt to 
establish the parties’ legitimate expectations with respect to the interaction 
in question. This would minimize the disruptive effect of legal rules and 
help to preserve interpersonal coordination. 
III. PURPOSES OF LAW 
The purpose of law for Hayek, therefore, is to preserve legitimate 
expectations and to enable interpersonal coordination and not to try to 
accomplish some end-state goal. Law provides order and predictability in a 
world characterized by unpredictability and “flux.”87 This also explains why, 
contrary to Posner’s statements, Hayek does not consider the judicial role to 
be “passive.”88 Posner mistakes modesty for passivity. A Hayekian judge 
merely has a different responsibility from a Posnerian judge. Whereas 
Posner exhorts judges to decide cases so as to further some external 
standard of value, such as wealth maximization, a Hayekian judge has the 
more modest responsibility of ensuring the internal consistency of his own 
decision within the overall operation of the spontaneous order—or, perhaps 
more accurately, spontaneous orders—in which the judge acts. 
Hayek justifiesthis emphasis on “immanent criticism”—or the internal 
consistency of particular rules within an overarching system of rules—by 
arguing that this approach to law is most likely to maximize interpersonal 
coordination.89 Because the purpose of law is to provide guidance to 
individual actors as to the predicted behavior of other individuals, law serves 
to preserve legitimate expectations.90 It follows, Hayek argues, that 
legitimate expectations are best preserved by making legal rules internally 
consistent within a given set of rules.91 When confronted with a dispute that 
cannot be resolved by settled rules, Hayek argues that the judge’s task is to 
make any new rule cohere smoothly within the set of existing rules.92 “If the 
decision cannot be logically deduced from recognized rules, it still must be 
consistent with the existing body of such rules in the sense that it serves the 
same order of actions as these rules.”93 Therefore, judges should not engage 
 
 87. Mario Rizzo, Law Amid Flux: The Economics of Negligence and Strict Liability in Tort, 9 J. 
LEGAL STUD. 291, 291 (1980) (discussing the economic-efficiency approach to the analysis of 
the common law). 
 88. POSNER, LAW, PRAGMATISM, AND DEMOCRACY, supra note 1, at 277. 
 89. HAYEK, supra note 10, at 118–19. 
 90. Id. at 119. 
 91. Id. at 115. 
 92. Id. at 116. 
 93. Id. at 115–16. 
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578 93 IOWA LAW REVIEW [2008] 
in an external critique of the “efficiency” of legal rules but, instead, should 
engage in a process of internal or “immanent criticism” of the extent to 
which any given legal rule or decision coheres with other related and 
conceptually surrounding rules.94 “[A]dvance here is achieved,” Hayek 
writes, “by our moving within an existing system of thought and 
endeavouring by a process of piecemeal tinkering, or ‘immanent criticism’, 
to make the whole more consistent both internally as well as with the facts to 
which the rules are applied.”95 Indeed, Hayek marks this emphasis on 
“immanent” versus external criticism as a distinguishing feature of 
“evolutionary (or critical)” rationalism as opposed to “constructivist (or 
naïve) rationalism.”96 Hayek argues that by focusing on improving the 
internal coherence of the legal system rather than on improving the legal 
system relative to some external benchmark, the judge thereby upholds the 
parties’ legitimate expectations and acts as “a servant endeavouring to 
maintain and improve the functioning of the existing order.”97 By nurturing 
the operation of the legal order through improvement of its internal 
coherence, the judge helps to maintain the overall coordination of society 
and of the economy that depends on legal order.98 
The Hayekian judge, thus, is not passive simply because he rejects the 
notion that a judge can or should try to remake society according to some 
more egalitarian or efficient standard of value.99 Rather, the judge should 
strive to preserve parties’ legitimate expectations. Note, however, that 
preservation of legitimate expectations often will be best furthered not by 
rote adherence to precedent, but by a prudent and thoughtful updating of 
rules to adapt to changing needs and expectations.100 In particular, because 
legal rules are just one element of the set of rules and practices that guide 
individual behavior in society, changes in non-legal rules may also affect 
legal rules such that in order to best preserve expectations and predictability 
about others’ actions, it will become necessary to amend some legal rules to 
better cohere with changing legal and non-legal rules.101 The objective is to 
increase social coordination such that individuals will have maximum 
freedom to act on local information as it arises. Interpersonal coordination, 
not aggregate economic efficiency, should be the overarching goal of the 
legal system. Hayek writes: 
 
 94. HAYEK, supra note 10, at 118. 
 95. Id. 
 96. Id. 
 97. Id. at 119. 
 98. Id. 
 99. As Hayek states the matter, “There is little significance in being able to show that if 
everybody adopted some proposed new rule a better overall result would follow, so long as it is 
not in one’s power to bring this about.” HAYEK, supra note 10, at 119. 
 100. Id. at 116. 
 101. The nature of legal change in Hayek’s view is further examined infra Part V. 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 579 
The distinctive attitude of the judge thus arises from the 
circumstance that he is not concerned with what any authority 
wants done in a particular instance, but with what private persons 
have “legitimate” reasons to expect, where “legitimate” refers to the 
kind of expectations on which generally his actions in that society 
have been based. The aim of the rules must be to facilitate that 
matching or tallying of the expectations on which generally his 
actions in that society have been based. The aim of the rules must 
be to facilitate that matching or tallying of the expectations on 
which the plans of the individuals depend for their success.102 
It is thus tempting to treat Hayek as a purely formalistic adherer to 
precedent, but such a view does not appear to be accurate. Such an 
interpretation of Hayek misunderstands two elements of his thought. First, 
Hayek’s view of precedent differs from the prevailing modern view of 
precedent—one that is accepted by Posner. Second, Hayek differs from 
Posner regarding the relevant unit of analysis for the study and evolution of 
legal rules. Whereas Posner examines law at the level of the individual rule, 
Hayek views the relevant level of analysis to be the system of rules. In other 
words, where Posner sees individual selection as the unit of selection for 
legal analysis and change, Hayek sees group selection among groups of rules 
as the operative model. Both points require some elaboration. 
A. PRECEDENT 
Hayek’s view of precedent differs from the prevailing modern view of 
precedent. Modern scholars operating under the mindset of legal positivism 
view the utility of precedent as serving to create and maintain expectations 
of parties about particular legal rules.103 For most of the history of the 
common law, although judges followed precedent where available, they did 
not follow the doctrine of stare decisis.104 Most commentators today collapse 
the two, treating precedent and stare decisis interchangeably.105 The key 
distinction is that under a principle of stare decisis, a single case authored by 
an authoritative court standing alone is binding in all subsequent cases; 
whereas precedent, as traditionally applied, arose only through a pattern of 
several cases decided in agreement with one another, thereby giving rise to a 
presumption of the correctness of the legal principle. Plucknett observes, 
 
 102. HAYEK, supra note 10, at 98. 
 103. See GERALD J. POSTEMA, BENTHAM AND THE COMMON LAW TRADITION 211–13 (1986) 
(noting the positivist roots of stare decisis); Harold J. Berman & Charles J. Reid, Jr., The 
Transformation of English Legal Science: From Hale to Blackstone, 45 EMORY L.J. 437, 514 (1996) 
(characterizing the strict doctrine of precedent as “essentially a positivist theory, more 
congenial to the codification movement but grafted onto the doctrine of precedent”). 
 104. See Zywicki, supra note 9, at 1565–81 (discussing the historical use of precedent and 
stare decisis). 
 105. See id. at 1566 (collecting sources). 
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580 93 IOWA LAW REVIEW [2008] 
“An important point to remember is that one case constitutes a precedent; 
several cases serve as evidence of a custom . . . . It is the custom which 
governs the decision, not the case or cases cited as proof of the custom.”106 
He adds, “A single case was not a binding authority, buta well-established 
custom (provided by a more or less casual citing of cases) was undoubtedly 
regarded as strongly persuasive.”107 
Traditionally, therefore, judicial decisions in particular cases were 
thought to illustrate or “discover” principles of law but were not themselves 
the source of authoritative law.108 Hayek approvingly quotes Lord Mansfield’s 
aphorism that “the common law ‘does not consist of particular cases, but of 
general principles, which are illustrated and explained by those cases.’”109 
Lord Holt, for instance, observed, “‘The law consists not in particular 
instances and precedents, but in the reason of the law . . . .’”110 Coke, who 
due to his extensive collection of cases had the resources to review 
precedent much more than previous judges, even so described precedent as 
“examples” of the “true rule” and not “in and of themselves authoritative 
sources of those rules.”111 As a result, the traditional common law judge was 
not “bound by any past articulation of that law, never absolutely bound to 
follow a previous decision, and always free to test it against his tradition-
shaped judgment of its reasonableness.”112 
For most of the common law’s history, therefore, the force of precedent 
derived from its persuasiveness and “congruence of legal decisions with 
expectations, reason, and judgment,” not from its binding force as 
authoritative stare decisis.113 The value of the rule or principle was 
demonstrated by the independent endorsement of several judges examining 
the wisdom of the rule rather than the authority of its author.114 Precedent 
was understood as a tradition derived from the decisions of a multitude of 
independent judges acting over the years and not the sovereign work of a 
“law-making” judge. The stricter form of stare decisis—that a decision in one 
 
 106. THEODORE F.T. PLUCKNETT, A CONCISE HISTORY OF THE COMMON LAW 347 (5th ed. 
1956). 
 107. Id.; see also A.K.R. KIRALFY, POTTER’S HISTORICAL INTRODUCTION TO ENGLISH LAW AND 
ITS INSTITUTIONS 275–77 (4th ed. 1958). 
 108. Zywicki, supra note 9, at 1568–69; see also Berman & Reid, supra note 103, at 445. 
 109. HAYEK, supra note 10, at 86 (quoting W.S. HOLDSWORTH, SOME LESSONS FROM LEGAL 
HISTORY 18 (1928) (quoting Mansfield)). 
 110. C.H.S. FIFOOT, LORD MANSFIELD 16 (1936) (quoting Holt). 
 111. Berman & Reid, supra note 103, at 447; see also CARLETON KEMP ALLEN, LAW IN THE 
MAKING 143–50 (2d ed. 1930). 
 112. POSTEMA, supra note 103, at 194–95. 
 113. Zywicki, supra note 9, at 1578. 
 114. See J.G.A. POCOCK, Burke and the Ancient Constitution: A Problem in the History of Ideas, in 
POLITICS, LANGUAGE & TIME: ESSAYS ON POLITICAL THOUGHT AND HISTORY 202, 213 (1971); 
A.C. Pritchard & Todd J. Zywicki, Finding the Constitution: An Economic Analysis of Tradition’s Role 
in Constitutional Interpretation, 77 N.C. L. REV. 409, 491 (1999). 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 581 
case binds subsequent decisions—did not emerge until the mid-nineteenth 
century, reflecting the rise of legal positivism and the accompanying belief 
that law is created by a particular judge’s decision rather than discovered as 
a principle from the decentralized and spontaneous agreement of several 
independent judges over time.115 
Hayek, therefore, calls for judges simply to follow the example of 
traditional common law judging and enforce the settled principles 
embedded in the law.116 This is in opposition to the view of judges “making” 
law and binding, through stare decisis, future judges to their enlightened 
commands. Thus, following the traditional common law vision of precedent, 
Hayek believes that it is the legal principle that should be followed, not the 
precise terms of the rule itself.117 Although compliance with the more 
precise legal rule would appear to maximize coordination and predictability, 
Hayek observes that this appearance of predictability is illusory.118 In 
comparison to the precise terms of a particular rule, the more abstract 
underlying principle will both be more stable and provide a better guide to 
expectations about how others will behave. Whereas particular rules can 
change rapidly, principles change only gradually.119 Hayek writes: 
It seems to me that judicial decisions may in fact be more 
predictable if the judge is also bound by generally held views of 
what is just, even when they are not supported by the letter of the 
law, than when he is restricted to deriving his decisions only from 
those among accepted beliefs which have found expression in the 
written law.120 
Moreover, articulated verbiage in written judicial opinions is only the 
imperfect reflection of the principles that underlie any given opinion.121 
Thus it is the principle that should govern, not the precise language of the 
case. 
The more flexible understanding of precedent from the traditional 
common law is captured in Hayek’s characterization of the common law as a 
 
 115. See POSTEMA, supra note 103, at 210–17; see also Berman & Reid, supra note 103, at 514 
(characterizing stare decisis as “essentially a positivist theory, more congenial to the codification 
movement but grafted onto the doctrine of precedent”); Caleb Nelson, Stare Decisis and 
Demonstrably Erroneous Precedents, 87 VA. L. REV. 1, 38 (2001) (noting the influence of Bentham 
on the American move toward stricter stare decisis). 
 116. See HAYEK, supra note 10, at 117. 
 117. See id. 
 118. See id. 
 119. This insight is elaborated in greater detail by Bruno Leoni in BRUNO LEONI, FREEDOM 
AND THE LAW (1961). 
 120. HAYEK, supra note 10, at 116. Moreover, he argues that where judicial decisions have 
most departed from public expectations is when the “judge felt that he had to stick to the letter 
of the written law” rather than informing the written law with generally accepted expectations. 
Id. at 117. 
 121. Id. at 78. 
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582 93 IOWA LAW REVIEW [2008] 
spontaneous order.122 Hayek does not simply characterize the virtues of a 
precedent-based legal system in the cost–benefit terms advanced by modern 
commentators, who champion stare decisis because they say it increases 
predictability while minimizing administrative costs.123 Instead, Hayek shares 
the traditional view that cases are merely illustrations of more abstract legal 
principles; cases are not “law” in and of themselves.124 The independent 
efforts of many judges deciding many cases over time generates legal 
principles, and it is those principles that matter, not the constituent cases 
themselves.125 The legal principles that emerge from this implicit 
collaboration among many judges reflect greater wisdom and consensus 
than any individual judge deciding any individual case.126 Thus, it is that 
Hayek characterizes the common law as a spontaneous order in the same 
way that the market is a spontaneous order.127 Just as a market price for a 
particular good or service emerges from the decentralized interaction of 
many individuals, legal principles similarly emerge from the decentralized 
process of the common law.128 Moreover, Hayek argues that the law that 
emerges from this decentralized common-law process will be better than 
legislative law or its equivalent, law imposed by a judge in a single case and 
followed under stare decisis in subsequent cases.129 This is because the rule 
that emerges will have been tried out in several different factual contexts 
and found to be reasonable and in accordance with the parties’ 
expectations.130 As such, the legal principle comes to be understood and 
relied upon in the community.131 Indeed, Hayek provocatively argues that 
judges do a disservice when they adhere to the letter of a precedent when it 
conflicts with a more coherent principle, in that it is the principle that does 
andshould guide individual expectations, not the letter of the particular 
precedent.132 
Hayek’s view of precedent and the role of judges follows from his view 
of the dispersion of knowledge in society. Judges are not asked to make the 
“best” ruling in any given case because they are to be “passive,” as suggested 
by Posner, but rather because they can do better over time by deferring to 
 
 122. See id. at 118–22. 
 123. See POSNER, supra note 2, at 555 (stating that judges follow precedent, in part, because 
the legal certainty it promotes lowers the volume of litigation, lessens the need to hire more 
judges, and dilutes the power of existing judges). 
 124. See HAYEK, supra note 10, at 118–19. 
 125. See id. 
 126. See id. at 120. 
 127. See id. 
 128. See id. 
 129. See HAYEK, supra note 10, at 116–17. 
 130. See id. at 98. 
 131. See Pritchard & Zywicki, supra note 114, at 520. 
 132. HAYEK, supra note 74, at 26. 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 583 
the accumulated knowledge of wisdom and tradition in the law. There is 
thus a high degree of “redundancy” in the Hayekian view of the common 
law that is absent from Posner’s model.133 In Posner’s model, the law is only 
as good as a particular judge is wise. Hayek’s model, by contrast, is built on 
the insights of sound Burkean tradition, in that the common law reflects the 
accumulated knowledge of many judges collaborating over time. Indeed, 
Posner’s model surrenders the very purpose of Hayek’s framework—the idea 
that the common law is imbued with tacit knowledge that should be 
followed even if all of this knowledge cannot be fully understood and 
articulated. Thus, deference is shown to precedent not just because it 
reinforces individual expectations but also because the accumulation of 
precedent over time reflects a body of traditional knowledge that can 
provide a source of wisdom deeper than the learning or experience of any 
single or group of contemporary judges.134 Further, this body of traditional 
knowledge has not been consciously designed by judges over the years. That 
would merely be conscious judicial planning spread out over time. Rather, it 
is the repeated efforts of judges to coordinate legal rules with other legal 
and non-legal rules that coalesce over time into a spontaneous order, 
allowing for interpersonal coordination.135 
B. LEVEL OF SELECTION OF LEGAL RULES 
Hayek also differs from Posner in his characterization of the proper 
level of selection for the study of legal rules. Posner argues that there will be 
selection of the most efficient rules at the level of individual legal rules. 
 
 133. See Robert Sugden, Spontaneous Order, in 3 NEW PALGRAVE DICTIONARY OF ECONOMICS 
AND THE LAW 485, 488 (Peter Newman ed., 1998) (noting “redundancy” is a “crucial” property 
of spontaneous order). 
 134. See Andrew P. Morriss, Hayek & Cowboys: Customary Law in the American West, 1 N.Y.U. 
J.L. & LIBERTY 35, 40 (2005) (“Hayek assumes that judges cannot know enough to do what 
Posner expects them to do.”). 
 135. This understanding of tradition as not the accumulated wisdom of judges’ explicit 
views on legal problems but as the result of an evolution of legal rules interacting with each 
other and with society at large, helps avoid the problem of “information cascades” that have 
been raised as a criticism of Burkean traditionalism. See generally, e.g., Adrian Vermeule, 
Common-Law Constitutionalism and the Limits of Reason, 107 COLUM. L. REV. 1482 (2007) 
(analyzing the mechanisms that generate precedent and tradition); Cass Sunstein, Due Process 
Traditionalism (Univ. of Chi. Law Sch. John M. Olin Law & Econ., Working Paper No. 336 
& Pub. Law & Legal Theory, Working Paper No. 158, 2007), available at http:// 
ssrn.com/abstract_id=975538 (examining cases where the Supreme Court limited substantive 
due process to longstanding traditional rights). Because this concern is outside of Posner’s 
critique of Hayek, we do not pursue it here but merely state that the problem of information 
cascades applies when the Condorcet Jury Theorem is compromised through individual 
thinkers relying on past thinkers instead of thinking for themselves. This concern need not 
apply in the case of a spontaneous order because the answer to a problem (i.e., rule) is indirect 
as it arises out of human action but not from human design. See Pritchard & Zywicki, supra note 
114, at 491 (noting that similar decisions by varied courts were generally accepted as wise and 
reasonable). 
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584 93 IOWA LAW REVIEW [2008] 
Hayek, by contrast, views the relevant level of selection for legal rules to be 
the selection among groups of legal rules. Hayek’s selection mechanism, like 
Posner’s, is evolutionary in nature. The difference between the two, 
therefore, rests in the level of selection on which they see selection pressures 
operating. 
Posner’s view of rule selection is at the level of a judge choosing 
between alternative individual rules.136 Precedent binds the judge’s selection 
of these rules, but only to the extent that the judge feels it is best to adhere 
to that precedent.137 What a judge should choose, and what precedent 
generally entices him to choose, is the most efficient rule.138 For Posner, a 
classic example is Hadley v. Baxendale, the famous case explicating the limits 
on recovery in a suit for lost profits.139 In a Hadley-type scenario, A contracts 
with B for a service that—if performed as contracted—will result in a large 
profit for A. B does not know what lost profits A might have if he breaches 
his contract with A. B then breaches the contract and fails to perform the 
service for A. A therefore fails to achieve the profits he had hoped to garner 
through B’s service. A then sues B for the profits he did not make because of 
B’s breach. The example in Hadley itself was B fixing A’s crankshaft so that A 
could make money at grinding corn.140 The question presented is whether A 
can recover the lost profits (what he would have made from grinding corn) 
or merely the cost of the service B failed to perform (the cost of fixing the 
crankshaft).141 
To Posner, a judge faced with this question will base his decision on 
what is the better individual rule.142 The judge will review the relevant case 
law and, if the answer is fairly straightforward, decide whether he wants to 
follow those precedents or whether a different rule would be better.143 If the 
precedents are not straightforward, then he can simply apply the rule of his 
choice.144 In this way, Posner agrees with Hayek that the common law, over 
time, “tests” rules and gives rise to rules that are more societally useful.145 
However, this occurs through a process in which judges repeatedly analyze 
 
 136. See POSNER, supra note 2, at 560–61. 
 137. See id. 
 138. See id. at 267. 
 139. See generally Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854). See the 
discussion in POSNER, supra note 2, at 127. 
 140. See Hadley, 9 Ex. at 341–43, 156 Eng. Rep. at 146. 
 141. See POSNER, supra note 2, at 127; see also Hadley, 9 Ex. at 354–56, 156 Eng. Rep. at 151. 
 142. See POSNER, supra note 2, at 560. 
 143. See id. 
 144. See id. 
 145. See id. (“A rule of the common law emerges when its factual premises have been so 
validated by repeated testing in litigation that additional expenditures on proof and argument 
would exceed the value of the additional knowledge produced.”). 
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POSNER, HAYEK, AND THE ECONOMIC ANALYSIS OF LAW 585 
individual rules and assess which rule in a given instance yields a better 
result.146 
Hayek, by contrast, argues that the proper level of selection is at the 
meta-rule level, which is to say at the level between societies governed